How high-flying Hong Kong stock market could do real damage

A prior version of this column gave an incorrect name for Andrew Nyquist’s blog. The story has been corrected.

Sony Pictures/Courtesy Everett Collection

Crouching Tiger, hidden market crash?

Stock futures are not happy this morning, post-FOMC minutes and a not-so-thrilling kickoff to earnings season from Alcoa.

Some are talking about that split among Fed members spooking markets. What we could see, starting with futures, is a reversal of yesterday’s small gains — which weren’t really deserved anyway, says Oanda’s Craig Erlam.

M&A aside, it’s hard for this market to get super-motivated as investors ready for a white-knuckle earnings ride and continue to Fed-guess. But if it’s thrills you are seeking, then come on down to Hong Kong, where one newspaper front-page headline screamed ‘Go! Buy Hong Kong Stocks!’ (h/t “@gregorhunter) today. And investors did just that.

Thursday delivered a sixth day of gains for a wild Hong Kong market that soared 6.4% at one point. That leap came a day after Chinese investors used their entire daily quota for purchases in an official cross-border investment plan, launched a few months ago. And two weeks ago, Beijing started to let mutual funds buy shares in Hong Kong via a new trading link. It’s been all go.

So what? We all know Asian markets can be wild and woolly, but plenty of observers are starting to get freaked out. Our call of the day talks about potential collateral damage. Our chart of the day shows just what’s been going on the Hang Seng Index, and if you’re invested in any of those China-related ETFs, then you’d be wise to be paying a little attention to what’s going on right now.

Buried in a 38-page largely over-my-head letter to shareholders last night, J.P. Morgan’s Jamie Dimon waxed on about the next possible financial crisis. He said any number of things could trigger that, such as rumbles from Asia. “While the past crisis had different roots, they generally had a strong effect across financial markets.”

Or maybe it’s nothing, that China stuff.

Key market gauges

Futures on the Dow
US:YMM5
and the S&P
US:ESM5
are a little bit lower in the early going, building up to a negative start for Wall Street. In Asia,
ADOW, +0.66%
the Hang Seng
HSI, +0.98%
closed up nearly 3%. Europe
SXXP, +0.34%
is fairly perky. Gold
US:GCM5
is not happy, and the crude-oil
CLM25, -50.44%
yo-yo is on the up again. Hong Kong has been intervening to keep its dollar within a trading band, on the back of that heady day there.

The quote

“Some things never change — there will be another crisis, and its impact will be felt by the financial markets. The trigger to the next crisis will not be the same as the trigger to the last one — but there will be another crisis.” — Dimon in his annual letter to shareholders.

The economy

Weekly jobless claims are coming at 8:30 a.m. Eastern. Note that claims have been running below 300,000 for four straight weeks. Wholesale inventories for February follow at 10 a.m. Eastern.

Earnings

Alcoa
AA, +1.46%
is getting dinged. The company that ushers in the earnings season swung to a profit, but revenue missed forecasts, and shares got knocked in late trade. Sterne Agee, which rates Alcoa a buy, wasn’t so downbeat: “Overall, Alcoa is executing on the fundamental themes which we believe provide support for our near-term $17 price target.”

Andrew Nyquist at See It Market points out big recent move for iShares China Large-Cap ETF, which he says has been going sideways for much of the last five years. That ETF is up over 50% since Spring, finding “sunny skies this year, as FXI busted out “jailbreak style” to new 7-year highs.

See It Market

iShares China ETF

The call

Plenty of folks say this Hong Kong stock bonanza is gonna come to a head at some point — and they’re wondering whether it’ll crash and burn and maybe trigger a bigger crash for global markets. Bank of America Merrill Lynch’s “unrepentant China bear” David Cui expects the rally will keep going, but also says it’s “not a high conviction call rooted in any solid fundamental analysis.” And Credit Suisse’s Vincent Chan says it’s a worry that the government looks to be pushing this move. Read more on their thoughts at Barron's.

And there’s another worry for everyone else. “Since the Chinese stock market is now linked to Hong Kong, any crash here will first lead to a shakedown in China, and — since global central-bank liquidity is immediately fungible — a crash in China may well be the catalyst that take out the unprecedented global central-bank-liquidity bubble which has been reflating in virtually a straight line since 2008,” says ZeroHedge. Full thoughts on that here.

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